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Now that the U.S. unemployment rate is down to 7.4 percent, the Federal Reserve Bank of Dallas president Richard Fisher said the central bank’s policy setting committee is “closer to execution mode” in reducing stimulus.

However, Fisher noted that the Federal Reserve has created “a monetary Gordian Knot,” or a dilemma that’s become more complex with each phase of quantitative easing.

The Fed holds more than 25 percent of all mortgage-backed securities outstanding and continues to “take down” more than 30 percent of gross new mortgage-backed securities issuance, Fisher said. Also, he said the Fed’s current rate of mortgage-based securities purchases is outpacing the net monthly supply of such securities.

“We own a significant slice of these critical markets,” Fisher said today in a speech at the National Association of State Retirement Administrators in Portland, Ore. The central bank must be careful in cutting the knot so as not to disrupt financial markets in what he called “a delicate moment,” he said.

Fed chairman Ben Bernanke has said the central bank could start slowing its $85-billion-a-month bond buying later this year as the U.S. unemployment rate nears 7 percent and the economic outlook is strong. The U.S. jobless rate dipped to 7.4 percent in July from 7.6 percent in June and 8.2 percent in July 2012.

Fisher has made it clear that he thinks the Fed’s bond-buying policy has run its course in being able to further stimulate the economy. In May, he suggested the Fed start reducing its purchases of mortgage-backed securities given the recovering U.S. housing market.

In a speech at the Brookings Institution today, Federal Reserve Governor Jeremy Stein laid out the reasons why additional rounds of Fed bond-buying may have diminishing returns for the real economy.

Saying he supported the latest round of mortgage-bond purchases launched in September, Stein nonetheless described how further pushing down long-term interest rates may not have as much of an impact on capital investments by businesses.

Even as low, long-term interest rates incentivize firms to issue debt, companies don’t have to invest the proceeds in new plant and equipment, or other things that might boost output and employment. Instead, they can take the new money and use it to retire existing short-term debt, buy higher-yielding securities, or repurchase their own stock, Stein said. These “capital structure adjustments” are profitable for the firm, but they have less of an impact than if the company used the money to buy new equipment or build something.

This is happening in 2012, Stein said. U.S. nonfinancial firms are on pace this year to issue a record amount of investment-grade debt. The amount of speculative-grade debt may set a record, too, Stein said:

“A large fraction of this issuance has been devoted to refinancing, either to retire existing debt or to payouts to equity holders via either dividends or stock buybacks. These uses of proceeds have accounted for about 2/3 of all issuance by speculative-grade firms so far this year.”

Negative term premiums are influencing this behavior, Stein said. Even as Fed actions have pushed long-term rates lower, expectations of future short-term rates may not have changed that much.

This is why central bank communication is important. In its statements, the Fed has tried to give the public a better idea of the path of future, short-term rates, which is what the central bank actually controls with traditional open market operations.

Even as he explained the potential costs of asset purchases, Stein was clear about his support for the Federal Open Market Committee’s decision to purchase an additional $40 billion in MBS per month.

“Unemployment remains painfully high, and in my opinion well above the long-run structural rate of unemployment,” he said. “Absent policy action, progress on reducing unemployment will likely to be slow for some time.”

Federal Reserve Bank of Dallas president Richard Fisher today reiterated his view that further monetary easing to stimulate the economy is not needed.

Fisher’s comments during an interview on Bloomberg Television came on the heels of Boston Fed president Eric Rosengren’s call for more money to be added to the economy given the nation’s weak employment growth. It’s not the first time that some of the 12 regional Fed presidents have disagreed on monetary policy.

Fisher also cautioned that further Fed stimulus now could be considered political so close to the U.S. presidential election.

“We keep applying what I call monetary Ritalin to the system,” Fisher said. “We all know there is a risk of over prescribing. And we have to worry about the long term consequences of what we do.”